BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Do sentiment indicators help to assess and predict actual developments of the Chinese economy?
() and Jouko Rautava
Abstract: This paper evaluates the usefulness of business sentiment
indicators for forecasting developments in the Chinese real economy. We use
data on diffusion indices collected by the People’s Bank of China for
forecasting industrial production, retail sales and exports. Our bivariate
vector autoregressive models, each composed of one diffusion index and one
real sector variable, generally outperform univariate AR models in
forecasting one to four quarters ahead. Similarly, principal components
analysis, combining information from various diffusion indices, leads to
enhanced forecasting performance. Our results indicate that Chinese
business sentiment indicators convey useful information about current and
future developments in the real economy. They also suggest that the
official data provide a fairly accurate picture of the Chinese economy.
Keywords: forecasting; diffusion index; VAR; China; (follow links to similar papers)
JEL-Codes: E32; E37; P27; (follow links to similar papers)
27 pages, May 4, 2007
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